The Week in Muniland

Yet another challenging week for the municipal market, as the market continued to grapple with ongoing macroeconomic uncertainty as well as somewhat heavy supply. The curve continued to flatten last week, as two-, 10- and 30-year AAA yields rose 16, 18 and 9 basis points (bps), respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.81% last week, bringing year-to-date returns to –0.58%.

• Why it matters: We did see some underperformance versus US Treasuries as the market did its best to digest a heavy week of issuance. In addition, the market saw $599 million in outflows, according to Lipper. This was the first week of outflows in the last 18 weeks. While it is hard to pinpoint the exact driver of these outflows, it is not unsurprising given the volatility this month, and we are also approaching tax season. While after-tax spreads widened across the curve, the biggest increases were in maturities 15 years and in, where after-tax spreads increased upwards of 18 bps. Importantly, despite the outflows last week, the market still feels relatively orderly. The calendar next week takes a breather with the shortened week, with ~$8 billion expected to price, which should be more manageable and aided by March reinvestment cash from maturities and coupon payments.
  
  

The muni market has taken a drubbing so far this month, with the Index returning –2.72% so far in March.

• Why it matters: While there are still two days left, the Index is shaping up to post its eighth or ninth worst monthly return in the last 10 years, as geopolitical developments have created broader macro uncertainty that has bled into the municipal market. This macro uncertainty has hit the muni market at an inopportune time, coinciding with an increase in already-significant supply and a market that was expensive to begin with, particularly in short and intermediate maturities, as shown in Display 2. All that said, investors should remember we have been here before—last year. In 2025, the Index was up 1.50% through February, only to see those returns more than evaporate in March and April. But as it traditionally does, the market found its footing and delivered a solid calendar-year return of 4.25% in 2025. In our view, this month’s sell-off provides an opportune time for investors to invest in a market whose yields have increased upwards of 54 bps this month alone. Not only that, but relative valuations have improved significantly across the curve, and the market looks quite attractive both from an absolute income and relative value perspective.
  
  

Not only is the municipal bond market inefficient and fragmented, but it is also one where volatility presents opportunities for active managers.

• Why it matters: Performance. As we mention in our recent blog, Three Reasons Why It Pays to Be Active as a Muni Investor, a whopping 98% of active muni strategies have outperformed passive approaches over three-year rolling periods, and 87% have outperformed over two-year periods. Why? Active managers, by nature, have the ability to take advantage of opportunities and adjust positioning as market conditions change. For example, active managers can adjust duration and yield-curve positioning as the shape of the yield curve shifts, such as implementing a barbell maturity structure that targets short- and longer-term maturities while minimizing exposure to the belly of the curve. Another technique active managers can utilize is dynamic sector selection. An example of this could be the usage of treasuries—while munis generally make sense for high-tax bracket investors, there are instances where muni yields become lower than after-tax yields in treasuries. When this occurs, a small opportunistic position in treasuries may be appropriate, and managers can rotate out of those US Treasuries and back into municipals when they become more fairly valued.